Breaking the Pattern: They Don't Teach Things Like that at Harvard

02 April 2018

Source

Harvard Business Review Russia

Joint ventures are quite typical in oil industry. However, among many examples of partnership interactions Salym Petroleum Development N.V. (SPD) is in a league of its own. In 2003 its shareholders contemplated that in 15 years SPD would develop the Salym group of oil fields, produce oil, and be closed down as uneconomical. Alexey Govzich, SPD CEO, speaks about how Salym Petroleum Development N.V. manages to get set for growth after 5 years of production decline, keep yielding profit for shareholders, as well as break oil industry patterns.

Alexey, tell us please how you made it to SPD.

Prior to SPD I have been working for five years at Gazprom Neft which is our shareholder together with Shell. At Gazprom Neft I was Head of Drilling and Well Intervention. Besides close interaction with SPD in my discipline, I was a member of SPD Supervisory Board overseeing the company's performance. Therefore, I had information about the company, I saw its capacity. When candidacies for the position of SPD CEO were considered I proposed mine. Both shareholders supported it, and in April 2015 I became the leader of SPD.

In addition to professional interest, I was attracted by the opportunity to practice managerial knowledge. One year before I assumed the position of CEO I have graduated from Harvard Business School in General Management. We were taught quite a lot, and I was anxious to apply the knowledge in practice.

What was your main difficulty when you joined the company?

The key challenge at the new place was to create a team of likely-minded people, first and foremost, at the level of my direct reports. The company's specific feature is the fact that the key managers directly reporting to CEO are nominated by the shareholders in accordance with the Joint Venture Agreement. Every three years a substantial part of SPD Management Team changes. By this I mean not only Technical Manager, Finance and Commercial Manager, Chief Geologist, and Supply Chain Manager. Nearly the entire management team, including HR Manager and HSSE Manager, is subject to rotation. That is, the change is profound. In fact, all managers come with their backgrounds and visions which oftentimes do not coincide with that of their predecessors and of the current colleagues.

Has Harvard helped you in building the team?

The business case that we considered in the course of learning implied that managers had the liberty of action and choice. They generate the vision, the strategy, the expectations, and then select a team of likely-minded people. However, here at SPD the team was a given. An option like that was not studied at Harvard. As a result, there were many ideas but I didn’t know the people.

At the business school they told us a lot about changing the company’s mindset, about the importance of being focused on success, initiative support, development of the team’s trust in their own strength. Now many people, in oil industry as well, prioritize application of progressive technologies, digitalization, Industry 4.0. All of these are undoubtedly important, the future is theirs. However, alongside with that, one must not forget that no matter how hot the technologies might be, how fancy the results are that they yield, it is people who implement and use them. Therefore, it was important to change people’s mindset, the company's culture, and the recognition of being a part of the common cause.

How did you manage to align the team?

First and foremost, I needed to achieve mutual trust, to understand people, so that they understand me and my vision of the company. This was not easy: to delegate, to refrain from excessive supervision when you want so much to check, to enable people to show their worth.

Certainly, some time was spent on adaptation with the team. A corporate outing played a major role in creating the necessary atmosphere and the proper working attitude. We invited a powerful trainer for an in-depth training. During such session, each of us shared their innermost, spoke about their fears and concerns. All team members experienced a strong emotional shock. Whilst at the beginning inconsistency and scepticism went through the roof, by the end of the journey we all felt that we had come closer together. This was the beginning of a long journey; however, we came back home a different, more aligned team. The entire company saw that. We agreed upon many aspects: the principles of interaction, the rules of the game, we gave our promises of what we can do and what is absolutely inacceptable. We implemented the principle of personal accountability, which made it possible to substantially improve the discipline in the team.

We have also agreed that we were not representatives of different shareholders at SPD, we are SPD, one SPD team. Where formerly Management Team members might associate themselves with their respective shareholders rather than with SPD, the situation is different today. Then this affected the entire company, not only leadership. The SPD staff, seeing the unity of the management team, became more integrated. Through this, the company managed to bring back its uniqueness, its ID. People started perceiving the company’s victories as their own, and their achievements as the company’s successes. This is worth a lot.

Tell us about the second aspect that you have mentioned – about motivation.

People working for the company are very different. Some have grown in this company, this was their first job. Many employees have been working for SPD since the company’s first days. For instance, our current Operations Manager joined the company in 2006 and rose from Senior Operations Planning Specialist to SPD Management Team member. There are managers and experts who come to the company from shareholders, including expats. However, both of these, the SPD team as a whole, are the highest-level professionals in their trade. Having worked with them for three years I can say that with people like these you can implement just anything.

The main thing is to give the right motivation to each one individually and all of them jointly. And in my opinion, this is where the motivation is not so much tangible but rather related to the person's inner feelings. The feeling that grows deep inside, thanks to which you jump out of your bed in the morning and run to work. This feeling appears when people that it is their actions that the company’s development depends, that it is they who build its future.

SPD has passed the peak of production back in 2012, then the natural decline phase started. The company’s development strategy was then aimed at cost optimization and investment in the current production. SPD was considering projects execution of which might help increase production rate; however, the activities were generally focused not on development but on operating the infrastructure available. Moreover, the company had no strategic vision for the future. The focus was on the near term.

I was totally against such an approach, I believed in the company’s capacity, and wanted to prove that SPD needed investment in development. My team and I started working on a new strategy: looked at the long term – at what company would be able to achieve in 5-10 years. I remember I convened the team and said, “I am not even 40 yet, and I have not come to this company to watch it slowly dying day after day. Guys, do you want to be remembered as another rotation or as a cool team that has things to be proud of?” “Yes, we want to leave a mark!” was their answer. And we commenced, created the Strategy 2020 where we set ourselves very audacious but at the same time clear targets until 2020. For instance, in terms of production it is 7 million tons a year. Many people laughed when they heard this figure, twisting a finger at a temple, saying that SPD fields are depleting, production declines, that it was a natural phase in the company’s demise inherent to the majority of the region’s oilfields. And I was sure we would make it. The certainty of success spread across my team, and then across the company staff. Thanks to the spirit, enthusiasm, winner mindset, people started believing in the company again, their eyes were burning.

People are motivated by the challenge and the outlook. Having generated the strategy, we gave them the challenge, and showed them the outlook for the company, and also made it clear how each employee could help it reach these targets. People were enabled to unveil their capacity, and we as Management Team supported them in this by creating the atmosphere of trust, openness, and respect.

Are burning eyes the secret of SPD’s success?

It seems to me that in fact this is the case. The company started developing the Salym group of oil fields 15 years ago. There was an inconceivable drive when the colleagues built and started up the very first operating facilities, grew oil production. However, as the time went by, the targets and operating tasks became more routine, and the staff lost the winner mindset. Second wind was required.

There is an expression in the English language – success breeds success. This is largely applicable to SPD. And the secret is not only the ambitious goal. It is important for people to believe that their opinions count, and to see results of their activities. And thanks to the small size of the company, people here see their ideas implement and yield results. Thus, for instance, we were the first in Russia to have launched the Smart Fields technology that makes it possible to control wells in real time remotely - for instance, from the Moscow Office. We deployed it on two well pads and saw an amazing result. Then in a matter of a few years this technology was transferred to the entire oilfield. We have over 1,200 wells now, and each one is equipped with this technology.

I’ll give you one more example. It is a good illustration of the unconventional approach to business and the atmosphere of trust created in the company where we listen up to employees’ ideas. We have recently discovered large oil reserves at an existing field. Several years ago, seismic was performed there, although at that time no one saw a promising deposit there. Later on, our employee had an idea to take a different look at the seismic data. He shared his hypothesis, we analysed it, collected additional data, after which we drilled an exploration well which yielded 300 tons net oil inflow. This is an incredible result: in Western Siberia, not even new fields have such volume of reserves now, while we speak about a small area in an almost depleted section. I speak about additional 40-70 million tons STOIP.

Thanks to the company’s small size and structure, we can think unconventionally, break patterns, quickly test state-of-the-art technologies and business approaches, implement things that work, and cast away what proves inefficient.

Everyone has failures, and many people focus on these: they investigate to understand why it hasn’t worked, or which elements in the management system have failed. This is a correct approach; however, oftentimes we start paying extra attention to it, forgetting the other aspect, the fact that it is also extremely important to analyse in detail the moments when we did something well or great. For instance, when we construct a well and break another drilling record, the entire team rejoices, we reward our drilling contractor’s crew. We also look closely at what allowed us to achieve such success. Thanks to approach like this we continuously improve processes and break records. Thus, notwithstanding the fact that our wells get longer and more complex year on year, we spend as much time on their construction as formerly, and sometimes even less than that.

Do your shareholders use this competitive advantage in any manner?

Yes, for instance, we were the first in Russia to have tested an enhanced oil recovery technology. To put it simply, it makes it possible to produce oil in a more rational manner: while now the average oil recovery percentage in the industry is 30-35%, the ASP technology increases this indicator by further 15%. In case it is replicated at other fields, the Khanty-Mansiysk Autonomous Okrug alone can produce additionally 2.4 billion tons of oil in 15 years. These figures are enormous, the entire Russia produces slightly more than half a billion annually.

When you declared that the company would be set for growth, were you not afraid that you wouldn’t make it? After all, you joined the company at the height of economic crisis when oil price was low and sanctions were imposed against Russia and Russian companies.

In my opinion, fear is the emotion that oftentimes hinders development of people as well as companies. It is in our company’s culture – not to be afraid of going against the tide, to try and risk, and assume accountability for the result. It is important to point out that the targets in the new strategy are a conscious and justified risk, – after all, when we were developing it we thoroughly analysed the state the fields, the infrastructure, and the company as a whole were in.

I wanted my team to see me not so much as another CEO but as a leader who can not only give a new impetus to the company's development but would also help everyone grow qualitatively in their professional domains. In fact, the company’s ambitious targets unveil new opportunities for every member of the team. Then, as they believed in this strategy, they received from me as much support for their work as capable. For instance, the sanctions required from us a tedious work in financial and legal aspects, while the enhanced oil recovery pilot start-up – building an efficient interaction with representatives of authorities, including regulators. In terms of safety, we have done a lot of work and achieved an outstanding indicator of 8.3 million incident- and injury-free man-hours. That is, 9 months of continuous oilfield operation under conditions of the Extreme North.

It turns out you actually managed to break the pattern that exists in the industry regarding companies with declining production?

I believe it to be correct for the industry and our shareholders to evaluate our work; however, we are proud of the result. The fact that we managed first to stop production decline and then to get set for growth is indeed very untypical for companies that have passed the peak of production. We have done a lot of work in terms of operating infrastructure upgrading, implementation of new drilling technologies, resource base development. However, the key success factor was exactly the focus on this team’s success, and confidence in ourselves.

You have lived in Canada for a long time. Can you tell us about your career on the other side of the Atlantic? Has your overseas experience come in handy in the position of CEO at SPD?

I went to Canada with my parents. I was 22, I have just graduated from the Gubkin Russian State University of Oil and Gas with a degree in Oil Well Drilling. The proposal to move appeared romantic then: North America, adventures… In Canada I have worked in oilfield services and oil-producing companies for about 10 years. Working in Alaska, North Atlantic shelf including the Grand Banks, famous for the world’s biggest ocean waves. It was very difficult but I learned to perceive many troubles philosophically, understood that one must always be focused on success and be confident in oneself.

At some point in time I decided it was time to go home. Upon return I led a Schlumberger subsidiary in charge of Russia and CIS, and then took office of Head of Drilling and Well Intervention at Gazprom Neft. Having studied the profession from the very downside, step by step, it is easier for me now to speak with people - both production operators and office employees.

In your opinion, what difficulties is the company facing in the near future?

Today, the company understands and believes that in a couple of years we will be able to achieve the things that appeared unachievable as far as 3 years ago. Yes, it will not come easy, tasks get more and more complex. In order to remain efficient, we must change quickly, improve our processes continuously, find and use emerging opportunities more actively.

It is sometimes easier to take the lead than keep it. The world brings us new challenges every time. Flexible interaction methodologies, digital technologies with artificial intelligence, machine learning, robotics, Internet of things, neuronets, and virtual reality. All of these are changing our industry and our company now. Modern and smart adaptation of these technologies and approaches is the company’s main challenge, as well as the secret of its future success. The SPD team must keep abreast of the times. And, notwithstanding the new challenges, it is important to retain the aspiration, drive, and enthusiasm it has now.